Crude Oil Performance Bond

A Crude Oil Performance Bond is one way a buyer can get some kind of guarantee that the seller will perform and deliver the product.

Nigerian Oil Services has seen these instruments used in a number of ways. Some buyers request a PB as a qualifier of the seller. They figure if the seller has had success delivering oil then they must have some money – if they don’t have any money then they haven’t delivered and they will not offer a performance bond. Wrong thinking, but it does work to wean out sellers that do not have any money.
Some buyers want to warrant continuous delivery. Refineries have a need to have consistent feed stock supply and this is one way to get compensation if that continuity ceases.

But Performance Bonds, as I have seen them, are the number one reason deals don’t even get to the contract stage (outside of unqualified buyers or sellers). This is because they are hard to negotiate.

We never offer a PB starting out in negotiations, because the NNPC will never issue one. So it is the obligation of each seller to make that choice depending on who the buyer is, what banking instrument they are willing to take. The only time we offer it is when a buyer demands it.

So the seller is not going to start out by offering to block funds of $4.4 million in their bank. Tying up the Seller’s money is not going to help them deliver.

You should know that the requirement from the buyer requesting a PB is always an active banking instrument.

So the buyer can not come in with an MT799 and expect a PB. It is always a active instrument like a MT700, MT760, MT103.23 (blocked in the seller’s account) or a DLC. This is because the PB is really an SBLC from the seller for 2% of the buyers banking instrument in favor of the buyer.
So an active instrument is always against an active instrument.

Which then requires a different procedure – which may require a different seller.
Because a PB does require blocked funds the offering of one may not always be available from each seller. For instance, if a seller already has a transaction in the works that requires a PB he may not be able to entertain another buyer that wants a PB because he then has to block another $4.4 Million (2% of 2 million bbls times $110 per barrel).

The other issue with a PB is the procedural verbiage is very specific, because banks aren’t allowed to solicit and there is always a battle about who goes first with their instrument. In most cases the buyer has to go first with their banking instrument or a promise of one. Sometimes with certain banks a promise is not good enough.

So switching the conversation from delivery to a guarantee is like reminding the buyer that the oil is not going to be delivered unless the seller puts up a PB. Which is psychologically like kicking somebody and then saying, I’m sorry but I have a bandage for you.

So we never start out offering a distraction unless the buyer insists that a distraction must be in place.

Now when we do have to provide a performance bond it introduces other issues into the contracting negotiations.

There is always a problem with performance bonds because they are an active banking instrument (an SBLC). A Seller’s bank will never commit to a PB unless there is an active instrument placed by the Buyers bank. This is partially because the PB is stated as 2% of the buyers banking instrument – no LC, no PB. But it is also because the bank does not want to loose its clients money.

And the buyer does not want to commit to the expense of the LC unless there is a commitment that there will be a PB placed.

With a PB the banks are ALWAYS at odds , “Who goes first?”

So this procedure has the principal’s banks talking to each other and then agreeing to present at the same time.

This is the only way I have found to get this done – it is not always agreeable to the parties and their banks.

NOMINATIONS, SHIPMENT & BANKING PROCEDURES

1. Seller issues draft contract, signed and sealed to the buyer and send together with his Company profile.
2. Buyer sign, seal and return to Seller including Buyer’s Company Profile, with SPA lodged to Buyer’s Bank. Seller lodges the same with his Bank. The electronically signed and sealed contract is legally binding and enforceable.
3. Seller/Seller’s bank gives a Pre-Advice letter to Buyer’s paying Bank that the agreement has been lodged in the bank, it is active and Seller is fully RWA to proceed as per the terms and conditions stipulated in the SPA and it is Ready, Willing and Able to issue to them a 2% Performance Bond if it receives an Operative, Documentary Letter of Credit “DLC”.
   Seller delivers the ICC recognized notary certified the Proof of Product documents (as per clause x) confirming availability of the product and seller’s rights to sell the product (by courier service) to the Buyer’s address for onward transmission to the Buyer’s bank. The copies of such set Seller delivers by e-mail to the Buyer to speed up the verification process.
4. Buyers bank and Seller’s bank communicate in the swift bank to bank system and simultaneously present to each other their banking instruments. Seller provides the PB in favor of the buyer for 2% of the buyers DLC and the Buyer provides the DLC for the cost of one shipment on the same day.
5. The Seller within 5 (five) banking days confirms acceptance of Buyer’s DLC than Seller nominates a vessel and notify the Buyer for acceptance.
6. Within 3 (three) banking days of the vessel’s acceptance by the Buyer, the Seller provides the electronic copies of the ASPATANKVOY Charter party agreement, available shipping documents (per clause 16.2) and information on the loaded Cargo vessel for the buyer’s independent check as to the form of issue.
7. Upon confirmation of shipping documents’ approval by the Buyer as issued in correct way by the Seller, the loaded ship sets off sailing to Buyer’s Destination.
8. Upon Vessel arrival at Destination, the Cargo shall be inspected by the Buyer’s designated inspectors for Q & Q and product verification before the Cargo shall be discharged.
9. Upon Verification and confirmation of the product after full discharge, the Buyer’s bank shall settle payment with the Seller by Swift against the shipping documentation as per contract.

X DOCUMENTS

1. Proof of product
   The Proof of Product (POP) should consist of the following documents issued in Original or copies certified by the ICC recognized notary:
2. POP allocation document or ATS issued or assigned, sealed and signed by NNPC showing Seller as beneficiary, valid for the actual period of time.
3. Export License issued, sealed and signed showing Seller as beneficiary valid for the actual period of time.
4. Export Permit issued or assigned, showing Seller as beneficiary, valid for the actual period of time and showing the product particulars.
5. Seller’s Company Act of Incorporation

Here is one bank’s verbiage for a performance bond:

ANNEX A {SELLERS BANK ACCEPTED SBLC VERBIAGE}

SBLC VIA MT760
INSTRUMENT LETTER OF CREDIT:
ISSUED BY:
LETTER OF CREDIT NO:
CUSIP NUMBER:
DATE OF ISSUE:
DATE OF MATURITY:
DATE OF EXPIRATION:
CURRENCY:
AMOUNT:
BENEFICIARY:

WE, THE UNDERSIGNED,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, HEREBY OPEN OUR IRREVOCABLE, TRANSFERABLE, UNCONDITIONAL, DIVISIBLE, ASSIGNABLE, AND CONFIRMED STAND BY LETTER OF CREDIT IN FAVOUR OF ((……………………………….)) FOR THE AMOUNT OF U.S. ((………………………)) MILLION USD ONLY ((DUE FOR SIX MONTHS FROM THE DATE OF ISSUE [●] (DATE,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,).

PAYMENT UNDER THIS STANDBY LETTER OF CREDIT IS AVAILABLE ON THE BENEFICIARY’S FIRST WRITTEN DEMAND VIA SWIFT, DRAWN UNDER THIS STANDBY LETTER OF CREDIT NUMBER: [●,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,] DATED [,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,] ON CONTRACT TRANSACTION NUMBER (,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,)

WE ENGAGE WITH YOU THAT THE DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS STANDBY LETTER OF CREDIT SHALL BE DULY HONOURED UPON PRESENTATION TO OUR COUNTER AT [,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,].
THIS LETTER OF CREDIT IS SUBJECT TO UNIFORM CUSTOM AND PRACTICE FOR DOCUMENTARY CREDITS 600.
THIS STANDBY LETTER OF CREDIT EXPIRES ON [●,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,].
________________________________________
(FULL NAME AND ADDRESS OF ISSUING BANK)

____________________________________________
FULL NAME & TITLE OF AUTHORIZED BANK OFFICERS.

Bank Officer (1) Bank Officer (
______________________________________________________________________________

Jeff Scott – CFO Google
Nigerian Oil Services LLC (USA)